The Causal Influence of Investment Goals on the Disposition Effect

Abstract

The disposition effect describes investors' tendency to realize gains more frequently than losses. While it is one of the most robust findings in finance research and there is an extensive body of literature examining its theoretical foundation, relatively little attention so far has been paid to ways in which the disposition effect could be mitigated. This is surprising considering that the disposition effect entails negative wealth consequences. Therefore, we conduct an experiment that investigates the influence of investment goals on the disposition effect. We find that subjects who are provided with a specific investment goal exhibit a reversed disposition effect. This result stems from the fact that those subjects realize paper gains less frequently. Their behaviour with regards to losses, however, does not change significantly.

Keywords: disposition effect, experimental finance, investment goal, behavioural biases

JEL Classification: D12, D14, G11, G41